What is a financial system?
A financial system is a group of markets and go-betweens that allow the demand of cash-flows to meet the supply.
The go-betweens or intermediaries are usually commercial banks, investment banks, mutual funds, insurance companies�etc
A commercial bank is a financial institution that provides services such as accepting deposits and giving business or personal loans. A good example would be Soci�t� G�n�rale (France) or HSBC.
An investment bank performs a variety of services which includes underwriting, acting as a medium between an issuer of securities and the investing public, facilitating mergers and other corporate reorganizations, and also acting as a broker for institutional clients. Some famous I-banks: Goldman Sachs, Morgan Stanley, Merrill Lynch�etc
A mutual fund is a collection of stocks and bonds. It can be considered as a company that brings together a group of people and invests their money in stocks, bonds, and other securities. Each investor owns shares, which represent a portion of the holdings of the fund.
Insurance companies pool money (premiums) from individuals or other entities in exchange of financial protection or reimbursement against losses. Axa, Allianz and Willis are examples of insurance companies.
What is a financial instrument?
It is a financial agreement between the buy-side and the sell-side that defines the conditions and terms of money exchange.
A financial instrument can be described as a cash-flow generator with a label specifying when and under which condition the cash flow will be generated.
Financial instruments include stocks, bonds and derivatives.
A stock is a type of security that signifies ownership in a corporation and represents a claim on part of the corporation's assets and earnings. It gives the investor a dividend if the management has chosen to do so and the right to vote and participate in the administration of the company.
A bond is a debt investment with which the investor loans money to an entity that borrows the funds for a defined period of time at a specified interest rate.
Derivatives are securities, such as option or futures contract, whose value depends on the performance of an underlying security or asset.
Next section: Time value of money
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